Welcome rethink on FTAs

Relevance: Significance of International trade to Indian Economy

Synopsis: Increasing exports is important criteria for India’s sustained economic growth in the future.

Context

The government seems to be resetting its position on trade policy. The Union commerce secretary recently said that India would fast-track free trade agreements (FTAs) as the country needed to engage with the rest of the world. Since the world is moving towards bilateral and regional trade arrangements, such deals would be important.

What is an early harvest” agreement?

Recently, during an interaction with export promotion councils, the Union Commerce and Industry minister said that “early harvest” agreements with a host of countries, including the UK and Australia, were progressing fast.

• An early harvest deal is a precursor to an FTA, in which the trading partners reduce tariff barriers on limited goods to promote trade.

How protectionism will impact India’s trade potential?

Economists have pointed out that since 2014, tariffs have been increased in about 3,200 product categories, affecting about 70% of imports.

The progressive reduction in tariffs after 1991 resulted in an export boom and helped India grow at a higher rate in the first decade of this century. However, a reversal in this policy position has affected trade over the last several years.

Why India needs to focus on exports & global trade?

1. Economic recovery: India needs to focus more on trade at this point because of its domestic macroeconomic position. Recovering from a contraction, the Indian economy will grow at a higher rate this year, but sustainability in the medium term remains uncertain.
2. Exports will boost growth: The government’s ability to drive demand will remain constrained because of existing higher levels of deficit and debt. Therefore, exports could become a driver of growth if the policy is carefully adjusted.

Suggestions/Measures

1. The government should re-evaluate the overall tariff policy to strengthen India’s position as a more open economy.
2. Indian industry should become more competitive and not seek protection.
3. A review of the position on the Regional Comprehensive Economic Partnership (RCEP) is also required. It is likely that conditions in FTAs with the European Union, or the UK, would be testing as compared to the RCEP. If India is open to FTAs with other countries and groups, the RCEP should not be an exception.

Why India Should Join RCEP?

One of the biggest concerns to join RCEP both from an economic and strategic point of view is the presence of China. However, staying away from the RCEP is not an answer.

• In today’s complex supply chains, it may not be easy to distinguish goods coming into India from other countries with significant value addition in China.
• Besides, being a member of the most dynamic trading bloc will allow India to become part of the global supply chain, which will make it more competitive and help utilize other FTAs that are being negotiated more effectively.

Conclusion

The way the government reshapes its trade policy in the near term will determine India’s growth trajectory in the medium to long run.